IR35 status tool

IR35 public sector changes

If you read our Autumn Statement predictions and review you’ll already have seen us talk a lot about proposed reforms to IR35 from April 2017. In the Autumn Statement, just two weeks ago, it was announced that reforms for contractors working in the public sector would be introduced on 6 April 2017. Yesterday, 5 December 2016, HMRC released their responses to the consultation earlier this year, additional guidance, and the draft legislation.

The changes will apply to all payments made on or after 6 April 2017. It’s important to note that this means all payments, even if the work was undertaken before 6 April or the contract agreed before that date.

HMRC have effectively created a completely new form of IR35, despite their assurances not to. Public sector work has been entirely excluded from the old IR35 and is now subject to its own specific “son of IR35”, called Chapter 10.

Although there is new legislation the actual basis for assessing “employment status” remains unchanged. Therefore if you were outside the old IR35 then you should expect to also be outside “son of IR35”.

The chain of supply

The draft legislation recognises the chain of supply, with the worker’s intermediary at the bottom and the end client at the top, defining the parties between in terms of whether they are higher or lower than one another. The party that pays the intermediary will be referred to as the Fee Payer (“FP”).

The FP’s responsibilities

Whilst the end client will be responsible for assessing whether conditions of employment are met, and for confirming the status to the FP, who will be responsible for determining how the new rules apply. To help them, the end client will be legally responsible for providing information on employment status to enable the FP to correctly apply the rules. If the end client fails to do so (within 31 days) they will be held accountable and forced to stand in the shoes of the FP.

Although the employment status test remains unchanged, there are fears that end clients will oversimplify the test, and alongside the FP take the line of least resistance, assessing many public sector workers as deemed employees subject to the new legislation.

Assessing working relationships

The legislation appears to suggest that the contract itself has a greater part to play in the assessment of working relationships. This is different to current thinking in the contracting industry, which suggests that day to day working practices have far more impact on one’s IR35 status than the contract itself.

It was also a surprise that the end client would play a major role in assessing whether the conditions of employment are met, or whether the FP will be able to reconsider the status applied.

The explanatory notes accompanying the legislation don’t explain this change, and whilst it does not appear there is any intention to rewrite the general employment test, the emphasis on the contract is still unclear.

What happens if you are caught within IR35?

The FP will deduct Income Tax and primary National Insurance from the payments made to your company. You may also find deductions from your normal contracted rate for Employers NI and the Apprenticeship Levy, as these will be liabilities the FP must also meet. Whatever happens, the FP won’t be meeting these costs and expect many contracts to be terminated or renegotiated between now and 6 April 2017.

In many respects the FP will account for you as an employee and will expect you to provide them with personal tax details. You are required to provide these under the new regulations.

The FP will report the income paid to you and the tax deductions alongside its own employees to HMRC. All very confusing because you will be taxed as an employee of the FP, whilst employed and paid by your company, but don’t for one minute expect that being taxed as an employee by the FP gives you any employment rights or rights to statutory payments or pension auto-enrollment. Government has been very careful to avoid assuming those responsibilities on behalf of the public sector.

At the end of the contract the FP will issue you a P45 and you will use that to declare your income on your personal tax return.

The worker’s responsibilities

The worker will be responsible for providing personal tax details to the FP, such as National Insurance number and tax code. This is particularly important because an emergency tax code would apply if a tax code is not provided.

Permitted deductions from the payment amount

The only permitted deductions by the FP will be:

VAT included in the payment made

Expenses incurred and recovered from the end client (and therefore included in the payment received)

Employment expenses incurred by the worker or intermediary

How this affects your company

Your company will not have to pay tax on the public sector income assessed as employment income under these new rules, and will be able to claim deductions for capital allowances and pension contributions not previously allowed by the FP.

Your company will not need to report any payments made to you personally that have previously been taxed by the FP, but will need to make a repayment claim for tax relief denied by the FP.

This is going to make your personal tax and that of the company not just messy but clearly at risk of double taxation. You will need to rely upon advisers that have a very clear understanding of the new legislation, otherwise tax relief may be lost or income taxed twice, especially where you have both public and private sector income.

Your company will deal with VAT in the normal way.

Intouch and what we are going to do

It’s time for legitimate contractors to have a voice. These proposals were intended to counter avoidance, but the draft legislation will most likely adversely affect legitimate Limited Company contractors. Whilst we have participated at various levels and engaged with HMRC, Government has not listened and has taken a very naïve path in the hope it will get them where they want to be.

Intouch will continue to argue the case on behalf of our clients and ensure its services to contractors help ensure their status is correctly assessed and taxed.

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Breaking news! Does today’s Autumn Statement harm or help Limited Company contractors?

Philip Hammond today delivered his first Autumn Statement as Chancellor of the Exchequer (and his last). He and the Prime Minister continue to compete for control of economic policy and are arm wrestling for the “glory sound bites”. Unless they get on the same page, the losers of this Pyrrhic victory will be you and I.

Famous for ill-conceived strategies implemented at a dangerous pace in the face of universal criticism, and ignoring calls for caution from industry experts (who HMRC asked for advice in the first place), HMRC and the Treasury just keep ploughing their own furrow regarding the flexible workforce.

Today’s statement offered public sector contractors no surprise good news, and worse no reason for private sector contractors to be optimistic. HMRC’s vision for a level playing field between employees and the UK’s flexible workforce continues to be deployed in the face of all arguments to the contrary. Mr Hammond continues to imply that anyone who is not taxed under PAYE is a tax dodger, and that any independent worker wanting to trade as a Limited Company is only doing so for the tax benefit. I wonder if this is a real belief or a view necessary to keep his job in a post-Brexit, post-Trump world of pragmatic politics.

HMRC are JAM (“Just about managing”)

“Passing the buck” is now officially written within the Autumn Statement. When policing employment status compliance gets too tough for HMRC and they end up in a JAM, they outsource the problem to the public sector supply chain (only affecting public sector contractors) and ignore advice from stakeholders telling them it will not work!

It’s such a pity that the Chancellor refuses to accept that the positive contribution from a vibrant flexible workforce is widely recognised by stakeholders as essential to the prosperity and economic recovery of UK plc, and therefore dangerous to ignore.

“Hammond and May never listen” ( I sound like Jeremy Clarkson)

Throughout the summer HMRC have “consulted” Industry experts, Accountants, Business leaders, Trade Associations and even the man on the “Clapham omnibus” searching for views and comment on key topics including: IR35 reform in the Public sector, and Making Tax Digital.

I wish that I could understand why HMRC are not listening. A significant proportion of stakeholder responses on both consultations are consistently negative about:

the unrealistic timetables being imposed

the lack of attention to detail in the implementation guidance

the absence of the digital tool for IR35 status assessment

the administrative burden being outsourced from HMRC to employers, service providers and taxpayers in an attempt to reduce HMRC’s cost of delivery

blanket self-justifications from HMRC of their own actions, which ignore the advice of the wider community and which do not stand up to intellectual scrutiny

There seems little evidence from today’s statement that smart people who work at HMRC are using their ears. A consultation process, which has merit in concept, becomes a waste of everyone’s time if consistent contributions from stakeholders across the UK are continually ignored.

“Hammond’s way”

So Mr Hammond let’s try it your way: Push on with the policy of forcing independent flexible workers in the public sector into a taxation straitjacket against their will, and against the will of the end hirers. Engagers (even public bodies) want control over the ease with which their business units can expand, they do not want to provide employment rights, and flexible workers are not asking for them. But to do that you will need to continue to vilify and call “tax dodgers” hardworking and proud independent workers, who are trying to put their family’s wellbeing ahead of their own.

Make sure that the public don’t work out that by passing the buck for determining Employment Status (because HMRC have failed to find a way to get it right) and by passing the costs of doing so on to the engager or supply chain, saves the Government plenty of cash (because I doubt you will ever find c£400m of “tax gap” that you’re looking for from contractors). Make sure also that the workers don’t blame you for the fact that their take home pay is being reduced, as the supply chain adjusts to protect its margins.

Proposals to remove abuse under existing flat rate VAT rules will follow in December and could affect the many innocent parties seeking fairness not abuse.

I am not saying that non-governmental stakeholders have exclusive access to crystal balls, but we do have ears and we use them more than you do. Your statement today affecting the contractor community is only as strong as your ability to get the implementation right. If I were to buy you and your colleagues at HMRC a Christmas present, it would be a large hearing aid. If you wanted to give independent contractors in the UK a Christmas present, just turn it on.

Want to know more?

Before the statement, we released our own set of predictions and wish lists on what we thought would happen and what we wanted to see announced. So were we correct? We will be sending out our full Autumn Statement review tomorrow, simply leave us your email address and we will ensure you are sent a copy.

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

HMRC’s proposed IR35 status tool

Last month, Intouch Accounting’s MD Paul Gough shared his thoughts on HMRC’s proposed IR35 status tool within the public sector. In this article he drew attention to the weaknesses in HMRC’s proposals and discussed the likely implications which HMRC appear to have neither fully considered nor understood.

As we wait for the outcome from the consultation phase, we read with interest the recently published response from the Office of Tax Simplification (OTS) in regards to the consultation document.

Who does the OTS side with?

The contracting community. The OTS believe the proposals will add unnecessary complexity to the already confusing subject of IR35. In particular, they believe it will:

increase administrative burden, as more information will be needed in order to help determine a contractor’s IR35 status

create boundary issues between the private and public sector, as the test’s final decision may not be binding and therefore lack certainty

the OTS have previously encouraged the use of a digital employment status tool, but now warn that a tool could only ever simplify the current process if, clear and easy to follow rules and regulations will show (without question) an individual’s working status

require two versions, to allow for different circumstances and businesses

finally, need to be updated on a regular basis

The Public Sector

It would be unfair to subject all contractors to these changes, without explaining in detail how their sector is affected and whether they should be operating within the proposed rules.

There’s also the ongoing concern that by enforcing such rules they will create an imbalance between private and public sectors. This in turn would make it harder for the public sector to hire contractors with specialist skills.

Protection for the engagers

There must be enforced protection for engagers who can demonstrate that they have taken all reasonable steps to obtain reliable information from the other parties in the supply chain that should have supplied it, but for whatever reason have not done so.

5% allowance

The OTS believe that should a contractor fall ‘inside’ IR35, the 5% deemed payment allowance should be eliminated, as it adds unnecessary complexity for the engager. Instead, the PSC should claim it separately.

VAT

If a contractor is found ‘inside’ IR35, then there should be no VAT implications. It is unfair for HMRC to make a PSC pay employer’s VAT whilst being forced onto the payroll.

Tests and the online tool

Parts one and two of the test (before progressing to the online status indicator) do not show conviction, as the decision is not final. The OTS believe that even if the first two parts did show conviction, it still may not apply as it does not allow wiggle room for any changes to the contract, which the engager / contractor may not be aware of.

Materials for the job

The majority of contractors and freelancers provide services which are predominantly knowledge based. If 20% or more of a contract is for materials which are wholly consumed in the services required to complete the contract, then it is automatically deemed to be ‘outside’ of IR35.

There are very few circumstances whereby Limited Company contractors, (such as those who specialise in the IT or finance sector for example), would use 20% of materials to complete a contract and therefore cannot be classed as ‘outside’ under this rule.

Personal service and control

If the 20% test is failed, the engager must then move onto the second part, two questions on personal service and control questions. Should these two questions deliver a positive answer then IR35 will apply. If the engager is unable to answer ‘yes’ to both of these questions, they will then have to progress onto using HMRC’s online status tool.

Attempting to rely primarily on personal service and control tests to determine a contractor’s IR35 status is simply not appropriate for the majority of highly skilled contractors and freelancers. Whilst a highly skilled contractor may not be able to send another contractor in their place, this does not provide a definitive indication of their employment status.

HMRC should also consider the fact that for some contractors, especially those who work within the public sector where security is an issue, that sending a substitute to complete their work is simply not an option.

For skilled workers, the ‘control’ aspect of the test does not always give a clear-cut answer for whether the contractor is a disguised employee or not. Many stakeholders are of the opinion that such a test is more relevant for the lower skilled flexible workforce, where more direct oversight and control over how the work is performed is more common.

The OTS believe that unless the coding for the status tool is based on new employment status case law, then it will be considered biased in HMRC’s favour.

Penalties

The OTS completely agree that any tax rules should be supported with financial penalties and interest, but that it must be fair. The rules and procedures must therefore be easy-to-follow, to allow the engager to operate correctly and to avoid penalties.

The consultation period outcome

Whilst the exact date for the consultation outcome is still unconfirmed, Intouch will be reviewing it as soon as it’s published, so ensure you’re following us on social media and be first to get all the information and support you need.

Worried about how the proposed changes to IR35 could affect you? Our team of expert Personal Accountants are on hand to offer Intouch clients bespoke advice and support, that’s tailored to their circumstances and future contracting goals.

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.